WASHINGTON — A senior House lawmaker plans to reintroduce legislation as early as Thursday requiring the IRS to fast-track the income verification process, which proponents say could help reduce the financial industry's dependence on credit bureaus.
As heads continue to roll in the wake of the Equifax breach, Rep. Patrick McHenry, R-N.C., said his bill would be a step up from how lenders currently verify a potential borrower's financial data.
“We need to get away from relying so heavily on the credit bureaus,” McHenry said in an interview. "We need to modernize the way lenders verify identity. And a huge component of that is income verification and making that process much more seamless than it currently is.”
The bill is set to be co-sponsored by Rep. Earl Blumenauer, D-Ore., in the House, according to McHenry's office. It would require the IRS to automate the income verification process to speed it up for mortgage lenders, online lenders and a host of other financial institutions that screen borrowers. The legislation is also said to have support in the Senate from Mike Crapo, R-Idaho, and Cory Booker, D-N.J.
Under the current process, a prospective borrower must first authorize a lender to verify tax return information through a 4506-T form. The lender will typically go through a third party that processes requests with the IRS in bulk, to verify the information submitted by applicants about important financial information contained in their tax returns, including annual income.
But this can take anywhere from two to eight days because the IRS has to manually go into its system to verify the information. The new bill would require the agency to create an application programming interface to automate this verification process, once a borrower has signed off on it.
“The basis of the current system is the fax machine, which was the height of technology 20 years ago, and currently is not commensurate with the economic values and the current standards in the marketplace,” McHenry said. “We want to move it to the next generation of technology, which would create an API, enabling much faster information dispersal.”
He said improving inefficiencies in credit bureau reporting is as important as ever in the aftermath of the Equifax breach.
“What we want is the IRS to improve that process to avoid the disaster that Equifax experienced,” McHenry said. “We need to force the IRS to modernize this income verification process with cybersecurity safeguards.”
Proponents of the bill say those changes could also help subprime borrowers who have a history of financial health not necessarily represented in their credit scores.
“The effect could be really big,” said Louis Caditz-Peck, the head of public policy at LendingClub, an online lending company that first suggested the idea for an API in a 2015 letter to Treasury. “Imagine the difference in the decisions between mortgage, auto or small-business lending shifting from an overreliance on credit report information to a much deeper understanding of people's financial information.”
Today, the IRS verification process is too slow for lenders with speedy origination models, so they oftentimes have to make their decisions without the benefit of income data.
“The delay is so long to get the tax returns verified, that it prevents use of the tax returns in upfront credit models,” said Caditz-Peck. “So, when we use the 4506-T now, it has to be the last thing we do.”
But if financial institutions could verify prospective borrowers’ income faster, more nontraditional borrowers would be likely to get a loan, supporters of the bill say.
“There are a lot of borrowers out there that have low credit scores but that have a good financial background reflected in their tax records,” said Caditz-Peck. “This bill, if done correctly, will make capital more accessible, more affordable, faster, easier and safer.”
The tax return verification process is also a reliable way to authenticate a borrower’s identity — without using social security numbers or other sensitive information. Allowing more companies to use it could reduce vulnerabilities in the loan origination process, some say.
“Borrowers submit their bank statements, and that’s the number one source of fraud,” said Kathryn Petralia, co-founder and COO of the online lender Kabbage. “It would be another way for lenders to verify identity — and also verify revenue.”